GM in deal to shore up Delphi
WASHINGTON - General Motors Corp. agreed to pump billions more into Delphi Corp. in an effort to help its former parts unit emerge from bankruptcy by the end of the year.
Under the deal, reached after months of negotiations and outlined in a court filing late Friday, GM would assume responsibility for $3.4 billion of Delphi’s hourly pension obligations — up from $1.5 billion — and make payments totaling $1.2 billion through Dec. 31 to boost the supplier’s balance sheet. GM’s total financial support to Delphi would increase to $10.6 billion, from $6 billion.
GM also would reimburse Delphi for some payments made to union workers to encourage them to retire early or leave the company, and would buy some parts from Delphi through 2011.
The agreement, if approved by the bankruptcy court and Delphi’s unions, would pave the way for Delphi’s emergence from Chapter 11 bankruptcy after nearly three years of restructuring.
Delphi will ask a U.S. bankruptcy judge to approve the deal on Sept. 23. The company also will ask to freeze its hourly and salaried pension plans. GM would assume $2.1 billion of Delphi’s pension liabilities by Sept. 29.
The agreement with GM allows Delphi to avoid a new lien against $900 million of its foreign assets by the Pension Benefit Guaranty Corp., the government’s pension insurer. The PBGC had set a Friday deadline for Delphi to reach a deal with GM to take on the pension liabilities.
“This is a very encouraging step in the right direction,” PBGC Director Charles E.F. Millard said Friday. “As we have always noted, the transfer of a large amount of pension liabilities to GM is a crucial element in restoring Delphi’s financial health.”
In the court filing, Delphi revealed that it will continue cutting its work force and supply base. The supplier said it would have fewer than 7,700 white-collar employees by 2009, down from 10,243 today and 14,500 in 2005, the year it filed for bankruptcy. Its blue-collar work force would shrink to less than 5,000, down from 10,665 as of June 30 and 32,869 in 2005. The company will cut another 500 of its 3,200 suppliers by next year, down from more than 5,000 in 2005.
John Sheehan, Delphi’s chief restructuring officer, called the agreement with GM a significant milestone “in completing the final phases of the reorganization of our U.S. operations and positioning us to complete the financing required for our emergence from Chapter 11 as soon as practicable.”
GM has booked $11 billion in charges related to Delphi, which it spun off in 1999. GM spokeswoman Renee Rashid-Merem said that figure would grow as a result of the agreement, but it would be in the millions, not billions.
“This helps Delphi get into the best possible position to help them get financing they need and emerge from bankruptcy,” Rashid-Merem said Friday.
GM decided to move up much of its support of Delphi, rather than wait until the parts maker emerged from bankruptcy under a deal reached in January. That deal was put on hold in April when Appaloosa Management LP, Delphi’s largest shareholder, withdrew from an agreement to invest up to $2.55 billion in a recapitalized Delphi.
Appaloosa objected to, among other items, Delphi’s growing reliance on GM to help pay for its exit from bankruptcy after the collapse of the credit markets made it difficult for Delphi to borrow money elsewhere. Delphi filed suit in May seeking to force the private equity firm and its partners to fund the plan.
Delphi’s inability to emerge from bankruptcy has been a lingering issue for GM that now would be resolved if the plan is endorsed by the bankruptcy court judge, Standard & Poor’s analyst Gregg Lemos Stein said.
“If the agreement is approved, it is a step towards possibly a resolution of the Delphi situation that avoids the worst outcome for many parties, including GM, which would be a Delphi liquidation,” he said.
Assuming responsibility for Delphi pension liabilities doesn’t cost GM any cash, because the automaker has an overfunded pension plan, while Delphi’s pension plans were underfunded by $3.3 billion as of the end of 2007. Delphi has also missed more than $300 million in payments to its pension plan this year. The plan covers about 85,000 people.
Delphi’s creditors committee late Friday filed a strongly worded objection to the agreement with GM, saying Delphi gave up too much to the automaker’s “extreme demands” including “an abdication of control to GM.”
In exchange for the payments, GM would be able to file a $2.5 billion administrative claim against Delphi, but it would be behind other creditors in the bankruptcy.
Delphi’s chief bankruptcy attorney Jack Butler said in a court filing Friday that without additional support from GM, “a viable standalone business plan might not be possible” and it was the only option that made sense.
Delphi is also assured ample liquidity through year’s end with the infusion of $1.2 billion from GM, which will ensure Delphi has access to credit. Delphi has struggled to get exit financing, delaying its emergence from bankruptcy. The supplier burned through $960 million in the first half of the year, with some investors urging it to shut down its money-losing North American operations
“Despite recent challenges — including difficult credit markets, the downturn in the U.S. auto industry, and other cost pressures — our operating performance has improved significantly,” Delphi President and CEO Rodney O’Neal said in a statement.
GM will still end up with stock in Delphi after it emerges from bankruptcy, and still has a claim it could file against Delphi if it does not emerge.
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